Domino's Pizza (DPZ +1.42%) reported third-quarter adjusted earnings per share of $2.49, below the consensus analysts' expectation of $2.79. Revenue came in better than expected at $967.7 million (versus consensus projections of $953 million), boosted by higher comparable-store sales and store counts in the U.S. But earnings were impacted by higher compensation, food, and COVID-19-related expenses.
Here are three takeaways investors should note from the quarter.
Image source: Domino's Pizza.
1. Higher costs, pressured margins, and operational restrictions
Domino's margins in the third quarter were negatively impacted by higher costs: food costs, costs of supplies, and COVID-19-related labor costs. Food costs have been rising from COVID-19-related supply chain issues. Between February 2020 and May 2020 food costs for restaurants rose 38%, according to restaurant supply chain company Buyers Edge Platform.
It is unclear when the higher costs related to COVID-19 will end. CEO Ritch Allison said he believes the company will "continue to see some elevated costs around safety and cleaning equipment [and] enhanced sick pay" as long as the pandemic continues. In the U.S. and Europe, there are regions that have still have strict restrictions around restaurant operations. Restaurants in London were ordered to close at 10 p.m., starting Sept. 24. The early closing time could last as long as six months.
2. U.S. comparable sales are strong, helped by new-product launches
U.S. comparable sales increased by 17.5% in the third quarter, above the 16.1% increase in the second quarter and 1.6% increase in the first quarter. The improvement in the third quarter was driven by a blend of order growth and ticket growth. Quick-service restaurants are still seeing brisk demand as consumers favor safety and convenience when dining out or getting delivery.
Domino's innovative service methods and new product launches are helping to boost revenue. For example, the company's car-side delivery option is very popular with guests and offered at most of Domino's stores. "Our Domino's car-side delivery has been overwhelmingly embraced by our franchisees and is available today in over 95% of our U.S. stores," Allison said on the third-quarter earnings conference call.
In the third quarter, the consumer discretionary company introduced new chicken wings with updated sauces and two new specialty pizzas: a cheeseburger pizza and a chicken taco pizza, both of which launched in August. Feedback from guests has been positive on the new products. New product launches are good for driving customer traffic and increasing interest.
3. International growth was robust, but there may be some risk to future store growth
The international segment's comparable-store sales increased by 6.2% in the third quarter, higher than the 1.3% increase in the second quarter. The increase was driven by more delivery orders, which are often larger tickets because they tend to have more items per order than takeout orders. International business was also boosted by a reopening of stores and decreased restrictions related to COVID-19 in many markets.
There is some risk that additional international store openings could be delayed due to COVID-19 restrictions. CFO Stu Levy explained on the Q3 earnings call, "We believe the pandemic has had a net negative impact on store openings globally in part due to government restrictions as well as general permitting and construction delays."
Although the segment grew in the most recent quarter, there could be a change in the prior projection of management's international store opening goal. "Given these delays and the choppiness in international store openings ... we are currently reassessing whether we will be able to achieve the timing of our previously articulated goal of having at least 25,000 stores opened by 2025," Allison said on the earnings call.
While many restaurants are facing challenges due to COVID-19 and higher expenses, Domino's is executing well and seeing comparable-store sales increases. The company is also well-positioned with value-priced and convenient offerings, appealing to consumers who are looking to save money and avoid crowds. While there is short-term uncertainty around higher expenses, the pizza company is optimistic around its medium- and long-term growth prospects.
